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Must Love Dogs

Flea-infested stocks can sometimes be an investor's best friends.

I've had the honor of spending some time with Inside Value advisor Philip Durell this year. I have even met his lovely wife. That is why if I were to propose that Philip should take out a dating classified with a "must love dogs" tag, it would probably come as a great shock to all three of us.

Stay with me, though. I have a point. Now, where did I leave that point exactly?

Oh, that's right. In the new Must Love Dogs romantic comedy that opened in theaters over the weekend, Diane Lane's character has a love-wanted ad placed on her behalf, stipulating that her prospective mate must cherish canines. Now, I'm not exactly sure where the intersection lies that crosses Wall Street with Diane Lane, but I can definitely see value investors as dog lovers.

I'm talking about turnaround investing, of course. A dog in your portfolio can be a beautiful thing. Granted, it's a shame how a dog has become such a derogatory term these days. Whether you're talking about a bar patron whose image is attractive only when filtered through beer-tainted goggles or a not-so-handsome stagnant stock, it does seem odd they we call them dogs. If only mutts and purebreds could join together and beef up their lobbying efforts, dogs might not have such a bad reputation. If you ask me, I think the cats are behind it.

Now, I'm not suggesting that Philip's market-thumping newsletter service is a makeshift dog pound. Some of his best-performing stocks have been companies such as First American(NYSE:FAF) and Omnicare(NYSE:OCR), which weren't broken at all. They just happened to be toiling away in what some would describe as boring industries. Shareholders certainly aren't yawning. The database and drug-delivery specialists have returned better than 50% apiece since being recommended by Philip.

However, it's clear that Philip is willing to take on a stray from time to time -- if the turnaround appears likely. That's the beauty of banking on the downtrodden. When you're right, the road to redemption can be pretty sweet as the depressed shares rally back into fancy.

Separating the doghouse from the outhouseDoes anyone remember when Tyco(NYSE:TYC) was seen as a thinking investor's GE? The company was making all the right acquisitions, and Dennis Kozlowski -- the heralded CEO at the time -- was impressively growing the company. Yet there's a funny thing about budding conglomerates. The fine print that reads "some assembly required" is easy to miss. Oh, that and Kozlowski wound up being a tax-evading, toga-partying, larcenous kind of dude.

However, as investors bid the stock down to the single digits in the summer of 2002, the company was quick to try and restore some financial credibility by shedding executives and gluing the company's pieces together.

Is the stock back to its all-time highs? No. However, with the stock perched at around $30 these days, investors who got in when the market was treating Tyco like some tick-infested mongrel made back their initial investment many times over.

Monster Worldwide(NASDAQ:MNST) is another misunderstood stock. It's now trading around $30, after fetching single-digit bids and asks three summers ago. That was when the bottom fell out of the job market and the online employment giant suffered a fate similar to many other companies with dot-com strongholds.

In retrospect, it seems so easy. These were simply companies with grazed knees. It wasn't a house of cards like Enron. Then again, one could argue that Bernie Ebbers at WorldCom -- now chugging along nicely as MCI(NASDAQ:MCIP) -- could give Ken Lay a run for his tainted money when siphoning greenery from a company is the name of the game.

"I love turnaround stories, stocks that are beaten down and undervalued by the market," wrote Philip in the very first issue of Inside Value nearly a year ago. That is when he went on to recommend MCI to his readers. Well, he was singling out the stock after it had emerged from bankruptcy protection. It worked out spectacularly for his subscribers. Six months after the initial recommendation, he suggested the shares be sold to lock in a welcome 47% return.

Keeping your dogs on short leashesIf you are giving your stocks pet names like Scruffy or Mangy, you may want to keep closer tabs on your investments. Not every roughed-up security is an understudy for the mythological Phoenix.

It's easy to get excited about Krispy Kreme Doughnuts(NYSE:KKD). After its sugary debacle (it bottomed out back in February), the stock has risen by better than 40%. There's fresh blood at the helm. The doughnuts are delicious. However, the company is going to take the long way back to Vindication City. It is a broken company. Its franchisee operating model is upside down. It's no easy fix. Patience may pay off, but patience will have to be patient.

You also have a company such as Sun Microsystems(NASDAQ:SUNW). The leader in UNIX-based servers is cash-rich. It hasn't been accused of fudging its numbers. There was no wild toga party for java developers on some exotic island. However, operational stagnancy has kept the stock mired in single digits for more than three years now. No one is arguing that Sun will disappear anytime soon. What is open to debate is whether the company has what it takes to grow its shareholder value again.

That's fine. Dogs last a long time, even if it may seem excruciatingly brief in human years. Just make sure you find a dog stock that doesn't mind going in for a bath when it gets dirty. A flea collar wouldn't be such a bad idea either.

Longtime Fool contributor Rick Munarriz is a dog lover. His childhood pet Lady -- a mutt by any other name -- lasted a hearty 18 years before calling it a dog's life. He does not own shares in any of the companies mentioned in this story.The Fool has a disclosure policy. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Author

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time with more than 20,000 bylines over those 22 years. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he splits his time living in Miami, Florida and Celebration, Florida.
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